In my last three articles (read part one and part two here), I discussed some concepts related to exiting a franchise system. In this post, I will continue by discussing trade secrets, and how they complicate the ability for franchisees to split from the system.
Trade Secrets. Trade-secrets are the heart of any franchise. The recipe to the secret sauce, the method for assembling a product quickly and efficiently, or the software and systems used to track dog grooming customers all can be considered trade secrets. And because of their importance and sensitive nature, franchisors do not allow ex-franchisees to use their trade secrets after leaving the system. Under the law, trade secrets must be protected, and a franchisor who does not actively protect its trade secrets can find itself limited from doing so in the future.
It is important for franchisees to understand that non-compete obligations and trade secret obligations can operate independently. While a franchisee may be successful in limiting or eliminating the non-compete obligations, he or she will still be prohibited from using the franchisor’s trade secrets. As such, the elimination of a non-compete does not always have the effect of allowing a franchisee to compete with the franchisor after leaving the system.
The problem is that it is often difficult to determine what constitutes a franchisor’s “trade secret.” Operating a franchised business requires franchisees to use many skills. Some of these skills are basic and widely known outside of the franchised system, while other methods and processes may not be well known and learned from the franchisor. Not all trade secrets are as clear-cut as a secret fried chicken recipe, and franchisees may not know what the franchisor considers a “trade secret” until the parties are in litigation.
Franchisees who are permitted to “compete” with their franchisor after leaving the system must understand the nebulous nature of trade secrets and make every effort to clarify the definition of trade secrets before joining the franchise and upon exiting the system.
If you have any questions on this or any other franchise related topic, contact me ator 301.575.0345.
ABOUT BRIAN LOFFREDO
Brian Loffredo is a commercial litigator with more than seventeen years of experience representing clients in the franchise industry. Brian routinely assists clients during the licensing and franchise/FDD review process, as well as with the resolution of franchise-related disputes, including those involving terminations, territorial disputes, fraud, disclosure/relationship law violations and breaches of contract.
In addition, Brian represents and counsels clients in the construction industry on matters involving litigation, construction defects, licensing and compliance, collections, mechanic’s liens, payment bond and Miller Act claims, contract drafting, and compliance with home improvement laws and other construction industry laws.
Brian also has extensive experience representing financial institutions with workouts, collections and residential/commercial foreclosures.
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